Managing student loan payments after graduation can be overwhelming, and it’s sometimes difficult to see light at the end of the loan tunnel, especially when it feels like you’re making little headway on your repayments. For many of college grads, the potential to reduce your monthly loan payments or interest rates is not only appealing, but it’s also greatly welcomed and needed.
Refinancing student loans can be a great option for graduates looking to make some strides in their loan-repayment progress. But, will refinancing your student loans ultimately hurt your credit score? In this post, we’ll highlight some potential advantages and disadvantages of student loan refinancing, and how it influences your credit score.
What Is Student Loan Refinancing?
Student loan refinancing replaces an older original loan with a brand-new loan from a private lender. Ideally, the newer loan will have lower monthly payments and/or a lower interest rate, allowing you to make more progress on the money you borrowed rather than having your hard-earned money go only towards interest.
Both federal and private loans can be refinanced, but it’s important to note that the refinanced loan will be from a private lender. In some cases, refinancing can take multiple original loans and replace them with one loan to reduce the number of monthly payments you, the borrower, has to pay.
What Are the Advantages of Refinancing?
Refinancing can offer some serious and appealing perks to borrowers, depending on the particular lender of your new loan:
- Lower interest rates
- Lower monthly payments
Having a new loan can allow you to ultimately save money on the interest you pay over the life of the loan.
What Are the Disadvantages of Refinancing?
As with all financial decisions, there are pros and cons, and despite the appeal of the above-mentioned benefits, refinancing a loan can have some negative consequences that a savvy borrower should consider:
- Give up benefits of federal loans – According to Rebecca Safier of StudentLoanHero.com, refinancing with a new private loan loses federal benefits, such as loan forgiveness programs.
- Lose option for federal income-driven repayment plans (IDR)
- May not be a better offer – According to Justin Pritchard of thebalance.com, “If you refinance into a new loan, you’ll often extend the term of the loan; it’ll take you longer to pay it off, and the payments at the beginning of the loan will be mostly interest.”
Will It Hurt My Credit Score?
Refinancing does not need to drastically hurt your credit score. In fact, if done correctly, it will only slightly impact your credit. Rebecca Safier from StudentLoanHero.com suggests “shopping” around for offers from lenders, as it “only involves a soft credit pull for many lenders,” and when ready, complete a full application with a lender who has an offer you like. Avoid submitting too many full applications because “your credit score could take a bigger hit” since lenders have to perform a hard-credit pull to complete an application, as Safier continues to mention. Be picky with choosing your lender. Doing your research can prevent you from over-applying and unnecessarily harming your credit score.
It’s also important to remember why you’re considering refinancing your student loans in the first place. If you’re struggling financially, it may be the best move for you. After all, your credit score is only one aspect of your financial health. It’s more important to take care of your financial situation because “what’s good for your finances is good for your credit,” as Rebecca Safier argues.
There are other ways you can organically boost your credit score, without having to put too much concern into whether or not refinancing will hurt it:
4 Other Ways to Boost Your Credit Score
- Make your loan payments on time, and be consistent—missing or forgetting payments can drastically attack your credit score. If you commonly forget to make payments, consider setting up automatic payments with your lenders, and set reminders on your phone.
- Establish a positive, lengthy history—sticking around with lenders and building a positive payment history with them by making timely, consistent payments goes a long way, particularly when applying for future loans!
- Keep your balances low—avoid maxing out credit cards and letting them hang around too long as it negatively impacts your credit score.
- Resist too many hard-credit checks—be careful about having too many hard-credit pulls. As discussed above, multiple, frequent hard-credit pulls negatively impacts your credit.
There are many things to consider when refinancing your student loans, but don’t let the fear of hurting your credit score keep you from making an influential decision for your financial health. As with all decisions, weigh the pros and cons of refinancing by researching what’s best for you and your financial situation.
To help you understand your options and learn ways to improve your credit score, you may want to consider working with a professional financial planning advisor. At Focus Financial, we offer financial planning guidance and investment services, and can help you find a financial advisor who can help you achieve your financial goals. Contact us today to learn how we can help!